Call to expedite remodelling tobacco financing

As the 2024 tobacco marketing season opens today, calls are growing for a strategic shift in the financing model for the crop.

Some industry players are advocating moving from offshore funding towards local financing to ensure Zimbabwe retains a greater share of the value generated by tobacco exports.

Despite being touted as the country’s second-largest single foreign currency earner after gold, tobacco exports are failing to deliver their full potential due to the contract farming financing model that sees a significant portion of export revenue staying offshore.

Industry experts estimate that Zimbabwe only retains around 12 percent of the net earnings from exports due to reliance on offshore funding to finance production.

The bulk of export revenue goes towards repaying loans, leaving limited financial benefit for the economy and farmers. A total of 112 916 farmers registered to grow the crop in 2024 compared to 147 748 in 2023.

With exports off to a strong start this year, the issue has become more relevant.

According to the Tobacco Industry and Marketing Board (TIMB), exports in the first two months alone were about US$370 million, compared to US$122 million in the same period last year.

This was after the country produced a record 296 million kilogrammes of the crop. Zimbabwe earned US$1,22 billion from tobacco exports in 2023.

The significant increase in exports shows the potential revenue that could be retained within Zimbabwe if a suitable local financing model is adopted.

Until last year, tobacco production was financed entirely through offshore funding before the Reserve Bank of Zimbabwe (RBZ) scrapped the provision requiring the “golden leaf” to be funded and purchased using offshore funding.

This aligns with the country’s Tobacco Value Chain Transformation, which seeks to increase domestic funding from roughly 7 to 70 percent.

Overhauling the tobacco financing model, some industry experts argue, would allow Zimbabwe to retain a larger share of the revenue generated by tobacco exports.

Agribusiness development expert Dr Midway Bhunu said in an interview that local financing of tobacco was the most viable way to transform the industry.

This would reduce external debts and keep the value generated by tobacco within Zimbabwe.

“Tobacco is an important crop to the economy of Zimbabwe considering that we are the largest tobacco producer in Africa and fourth on a world scale,” said Dr Bhunu.

“Localising the financing of tobacco is a noble proposal for transformation of the sector. It means we reduce international debt and stop exporting value.

“What is critical is to have sustainable financing mechanisms and I recommend that it is high time we take value chain financing seriously as an economy.

“Some of the value chain financial instruments such as physical asset collaterisation, risk mitigation, and financial enhancements are already in motion in other value chains, what is needed is to adopt and adapt to the tobacco value chain.”

Local banks have been reluctant to offer credit to tobacco farmers due to their lack of collateral, highlighting the need for sustainable financing mechanisms to support the sector.

“Financial innovations such as interlinked supplier-buyer-producer-bank financial arrangements to reduce cost and risk become handy,” said Dr Bhunu.

“On the Government side, it will be crucial to have policy innovations which are focused on prioritising and strengthening the value chain and investing in supportive infrastructure.”

The contract current system has also raised concerns about transparency. The nature of offshore financing makes it difficult to track how much money is invested in the tobacco industry.

After exports, a significant portion of the proceeds are channelled towards paying offshore loans used to finance contract schemes. A major concern plaguing the industry is the inflated cost of inputs like seeds, fertilisers, and pesticides.

Stakeholders point towards a consensus that these costs are often significantly marked up. Merchants stand accused of supplying inadequate quality inputs or simply charging exorbitant prices. Furthermore, their costing structures seem designed primarily to maximise profits on input distribution.

Industry players allege that some merchants employ a variety of tactics to inflate costs. These include adding margins, tacking in administration fees, and even imposing interest charges on the value of inputs.

The practice, known as transfer pricing, artificially increases the cost of production, leading to higher foreign obligations and ultimately, reduced net export proceeds.

While recognising the importance of contract farming, the TIMB has emphasised the need for local funding to ensure Zimbabwe benefits fully from tobacco exports.

“The local funding is a key factor in ensuring Zimbabwe fully realises the value of its tobacco and this is in line with the Tobacco Value Transformation Plan which seeks to raise local funding to 70 percent,” TIMB acting chief executive Mr Emmanuel Matsvaire said.

He said the local financing of tobacco production presented a potential opportunity to unlock significant resources for the country.

Farmers have criticised the contract farming model, describing it as a “debt trap.”

“It is a double-edged sword,” said a farmer in the Beatrice area, about 40 kilometres south of Harare.

“The cost of inputs is inflated, and the prices we receive for our tobacco can be manipulated. As a result, we cannot pay back all the debt, and we get stuck in a vicious cycle of debt.”

Other analysts say the success of the initiative to finance tobacco using local money depended on the Government’s commitment to create a framework that fosters domestic investment in the tobacco sector.

The Government’s US$60 million pledge to boost local tobacco financing is yet to materialise.

-herald